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Dec 19

Trade Agreements Are Helpful Because

However, countries can prevent this mechanism from working by aggressively intervening in foreign exchange markets. For example, the value of the dollar below economic theory is expected to decline relative to the renminbi, because the United States has huge deficits, while non-tariff barriers – such as import quotas, subsidies, standards and rules – must be converted into tariff equivalents, and this is often difficult and unreliable. In new areas of trade negotiations, such as services, investment and intellectual property, efforts to measure the impact of barriers are becoming even more difficult. Like trade in investment and capital, economists did not agree on trade in services after the Second World War. In fact, trade in services was seen almost as an oxymoron by early economists such as Adam Smith and David Ricardo, who believed that services were non-negotiable. This was also the view of trade negotiators for three or more decades after the introduction of the GATT. However, many economists believe that the dynamic benefits of free trade could be greater than the static benefits. Dynamic benefits include, for example, pressure on firms to tackle foreign competition more effectively, the transfer of skills and knowledge, the introduction of new products, and the potential positive effects of greater adoption of trade law. Thus, trade can affect both static effects and production (dynamic effects). To succeed in a neo-omelet strategy, a country naturally needs access to other markets foreseen by the gradual liberalisation of trade barriers under the GATT/WTO.

Neomennantilists generally focus on key industries chosen by the government, a strategy known as industrial policy. The success of industrial policy requires a far-sighted government. Japan had an extremely competent group of government officials within the Ministry of Industry and Trade (MITI), which monitored its industrial policy and was fundamentally immune to political pressure. Although MITI has been very successful, it has also made some missteps. For example, in their plan to develop a world-class automotive industry in the 1950s, MITI officials initially believed they had too many automakers and pushed Honda to merge with another company. Instead, Honda decided to invest in the United States and became a leading automaker. In addition to trade diversion and the creation of trades that have essentially static effects, participants in free trade zones and union unions also aim for dynamic benefits, such as expansion production, as companies take advantage of the growing size of the market to increase production and improve efficiency when firms adapt to increased competition.